It was recently brought to my attention that Amazon entered, or re-entered depending on your view of past events, the wine business last week. The new offering enables, oenophies, like myself, in 12 states (more coming soon!) the ability to access a selection of 1,000 wines ranging in price from $5 to $200. The direct delivery liquor business is one that is best characterized by red tape and unrealized potential. Few know this as well as Amazon who has been trying to break into the market for nearly 15 years. Amazon invested $30 million in Wineshopper.com in 1999, which subsequently went bust, and then sought a do-over through a partnership with New Vine Logistics, a concept that was felled by California regulators. This time around, Amazon has found a way to shift the regulatory burden onto its partners, the wineries, in order to enable the business model.

To the uninitiated, the above might simply be interpreted as another chapter in Amazon’s wine retail lore, a story about a company that is dogged in its pursuit of category leadership and not afraid to fail before it succeeds. However, to the trained eye there is more to the story. The reality is that Amazon’s ecommerce business is currently under intense pressure. Whether you believe that pressure is being driven by Amazon’s four wall retail competitors (such as Home Depot, Target or Wal Mart, among others) or the manufacturers themselves, Amazon’s dynamic pricing model has drawn the ire of the traditional retail supply chain to the point where they have started fighting back.  Notably, Target sent an open letter to manufacturers suggesting it was time to divide up the world and others have followed. So a logical response, while Amazon waits out (from its perspective) these merchandising reindeer games, would be for them to push into regulated markets where they can create real barriers to entry, and therefore garner favorable economics.

So how does this relate to pet ecommerce?  The answer is in pharmacy.  One of the most protected retail environments is, as you would expect, drug dispensary. Not only are there significant compliance hurdles at the state and national levels, the drug companies have the final say in who can operate in the market by controlling the supply. It would be logical to assume that if Amazon is going to make a play for regulated markets it would enter the pharmacy space, and as a corollary the pet pharmacy space.

However that strategy is not without its own issues. From an animal health perspective, the drug companies rely on the veterinarians to recommend and dispense their products, so any efforts to disintermediate them would be a non-starter. One might be tempted to assume that if Amazon could move a sufficient volume of human prescriptions, the drug companies would have to provide them access to their pet solutions. Given that Wal Mart moves hundreds of millions of dollars of human prescriptions on behalf of major pharmacy companies but does not have access to the animal health solutions from the same manufacturing base demonstrates the perils of that assumption.  Therefore Amazon needs a vet centric solution that is seamless to the customer, but as we have seen in their wine effort, “where there is a will there is a way”.

Setting aside the “how” and focusing on the “why” is also important. If Amazon can bring together the breadth of companion animal products currently available to them with pet prescriptions, they would have an unmatched merchandising mix in the industry.  Through its partnership with Banfield Pet Hospitals, PetSmart could conceivably replicate the strategy. However, PetSmart outsources its ecommerce infrastructure to GSI Commerce, and is contractually bound to them for some. Further, four wall retailers don’t pursue dynamic pricing strategies; this is akin to cutting off ones nose in spite of their face. Even if they could overcome the infrastructure hurdles and channel conflicts, they could not build a team that could compete with Amazon online (who can for that matter?). PetMed Express might seem like a competitive threat until one understands that they source their supply through diversion (authorized buyers re-selling product out their backdoor at a profit) and not directly from the manufacturers. Regulators and drug companies will eventually choke off this grey market supply chain. And that leaves Amazon as the last man standing.

I would not bet against them.

/bryan

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